Is Starbucks Stock Overvalued?

Starbucks Corporation (NASDAQ:SBUX) is the largest coffeehouse chain in the world and reinvented the market in the U.S.

Founded in Seattle, Washington’s Pike Place Market in 1971, SBUX grew to include a massive retail footprint and branded products in stores around the world.

Share prices surpassed many analyst’s Buy ratings of $80-90 which has some asking is Starbucks stock overvalued now?

Some investors feel bullish for Starbucks’ prospects in 2021. Two coronavirus vaccines coming down the pipeline signal an eventual end to widespread quarantines. More people are heading out shopping this holiday season. Even malls are seeing business again in some cities where they were once on life support.

Starbucks could have the energy to continue its rally to new highs. Pumpkin spice lattes remain a staple of holiday discussion, but its 128x P/E ratio leads some investors to be more bearish on SBUX share price.

There is a good chance other sectors could outpace its growth. We’ll stir up a shot of the company’s financials to see if it will get investors amped up or cause a caffeine crash.

Why Starbucks Stock Went Up

Starbucks has been on a hot streak since June 2020, recovering value lost when concerns were at a peak over its retail locations being shuttered globally.

Its summer earnings report showed a 38 percent year-over-year revenue decline that could be expected with the pandemic shuttering most cities. However, those who did stay loyal had the opportunity to increase their holdings by as much as 25 percent in that same timeframe.

Company executives offered a $3 billion in debt to boost liquidity while decreasing its credit rating. But it used that debt to pay cash dividends and support its franchisees and employees. Meanwhile, the company’s early investment in mobile and digital efforts paid off in the back half of the year.

Travel and other aspects of regular life may be slow to recover, but the need for a quick Starbucks fix isn’t going anywhere. The coffee giant impressed both analysts and customers with its efficiency during the crisis. It closed stores where necessary to focus its resources on maintaining profitability.

Some believe it may even grow post-pandemic. Let’s examine its books to find out why.

Starbucks Financials

Starbucks suffered a rare blip during the summer of 2020 when earnings went negative. Since then analysts’ expectations have become more optimistic and the future looks much like the past: positive, growing earnings.

Wells Fargo (WFC) is the most optimistic of Wall Street’s analysts: it has the highest Buy rating on Starbucks with a price target of $110.

Getting SBUX share price over $100 was hard for the company even before the pandemic hit. The company is known for providing a solid employee benefits package, increasing barista pay, and paying solid market prices for its coffee beans to help developing nations.

Starbucks is still opening stores, with 2,150 location openings planned for its fiscal year. However, the store closings will result in only 50 net new stores in the Americas.

Global same-store sales were down 9 percent heading into pumpkin spice season, but investors’ hopes rose by December.

The company has a market capitalization nearing $120 billion for the holiday season. Its $1.80 annual dividend is paid quarterly and increased by $0.04 for the November quarter.

A Nestle partnership is expected to feature heavily in its 2021 expansion plans. Nestle produces the companies packaged food and services.

With commuters less likely to dine in, the company may need to adjust to compete with rivals like Dunkin (DNKN) and Dutch Bros. Some investors fear the stock could be valued too high.

Is Starbucks Valuation Too High?

Like Starbucks, Dunkin (DNKN) is quickly closing low profit stores to focus on opening more profitable locations based on analytics.

However, more of Dunkin’s locations are franchised versus Starbucks, so its revenue is generated more from fees and rent payments.

Starbucks needs to maintain its market position in the Americas while also growing in an important Chinese market.

China’s economic recovery is as important as the United States to the coffee giant, and it has 4,600 company-owned locations in the country so far. It forged a partnership with Alibaba to allow Starbucks orders and payments through its family of apps.

The company also has partnerships with grocers like Albertsons (ACI) and retailers like Target (TGT) to place cafes within their stores. The economy may be shrinking, but Starbucks still has plenty of room to grow. However, it’s not clear if its growth will be tall, grande, or venti.

And it could drop through the rest of the year before it goes back up once the initial investor day hype dies down.

Will Starbucks Stock Drop?

The entire stock market reached a lofty valuation in December as concerns grow over COVID-19 outbreaks, vaccinations, and stimulus plans. Everyone’s on shaky financial footing during the holidays, and socially distanced Black Friday shopping was nothing like in prior years.

It’s trading well above its earnings, but much of this is based on its infrastructure spending. The company has a strong customer base and winter tends to be good for it. However, there’s still a lot of risk of the economy being hit with bad news through the next two months.

Should another coronavirus wave create another global economic shutdown, Starbucks isn’t immune to a recession. Still, pension managers and analysts feel the stock should keep up with the general market over the next five years.

Is Starbucks Stock Overvalued? The Bottom Line

Starbucks is the biggest coffee chain in the world. It redefined the coffee shop as a destination and expanded from coffee to a variety of brands across both restaurants and retail products.

It was affected by the stock market correction in 2020, but measures to pivot helped it recover to experience a historic high market capitalization by year end.

Pricing above $100 may be too rich for investors, and it’s best to wait for a drop to jump in. However, it may not dip significantly for another quarter if its expansion plans come to fruition.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.